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Utilities must embrace energy transition to survive: IEEFA

The bleak future facing utilities that do not commit wholeheartedly to the energy transition has been laid bare in a new report by US energy policy think-tank the Institute for Energy Economics and Financial Analysis (IEEFA).

“Electricity utilities that perform best going forward will likely be those that transition to renewable energy-based models in a way that avoids the financial damage typically incurred by late movers,” the organisation says in its Global Electricity Utilities in Transition report. “Those that avoid or work against the roll-out of renewables will be met by a future that does not include them.”

It adds that wherever utilities compete to sell electricity on an open market, “those at the forefront of renewables will see significant upside while the owners of fossil-fuel and nuclear-powered fleets will suffer”.

“Crucially, renewables need only capture a relatively small market share for disruption to occur, and to continue.”

The report points out that renewables generation, which has no fuel costs, is pushing down wholesale electricity prices around the world and consistently outbidding fossil-fuel generation.

“The rapid uptake of renewable energy, especially of solar and wind, has steadily undermined utilities’ traditional business models, particularly in countries where electricity demand is flat or in decline,” it says. “In such cases, zero-margin-cost renewables eat away at the utilisation rates of coal-fired power stations, often rendering them loss-making operations.”

In Europe, wholesale prices have fallen from around €80 ($94) per MWh in 2008 to €30 today, a fact that led Germany’s E.ON and RWE to separate their renewables and fossil-fuel operations.

Companies that are belatedly committing to transition, “have destroyed significant shareholder value in the meantime”, the report says, pointing to the International Energy Agency’s assertion that about $150bn of asset impairments were incurred by European utilities between 2010 and 2016.

'All industries evolve all the time – utilities are no exception'

The study cites Italy’s Enel and Florida-based NextEra as the forward-thinking global renewable-energy leaders that have gained the upper hand on their rivals.

Among those with the worst business plans are the US’s NRG, which has seen “the destruction of shareholder wealth”, and Japan’s Tepco, which has struggled in the aftermath of the Fukushima nuclear disaster.

But it is South Africa’s coal-focused Eskom that comes in for the greatest criticism.

“Eskom provides an example of a utility that not only fails to respond to the energy revolution, but fails its owners and its customers as well,” the report says.

The state-owned company is investing about $34bn in two massive, delayed coal-fired power plants totalling 8GW — despite already having about 5GW of overcapacity — while refusing to sign offtake agreements with renewable-energy providers that have won government contracts. It has debts of $26.8bn, which are due to almost double by 2021, but annual net profits of only $68.3m. It seems likely to slip into default in the next five years, placing a massive financial burden on the government, which has guaranteed much of this debt.

Unknowns linger as South Africa hopes for renewables restart

“Eskom’s campaign against renewables [which are about 40% cheaper than new coal-fired power in South Africa] and its insistence on building out coal-fired capacity in a market with declining demand will see Eskom’s borrowing and interest costs balloon, eliminating profits and crippling the utility’s ability to generate cash,” the report says.

“Efforts by Eskom to rectify management missteps through large tariff increases will mean yet more financial pain for the South African public, for whom electricity prices have quadrupled since 2007.”

The report concludes: “Electricity utilities still considering how and when to embrace the global shift toward renewables would do well to accelerate their transition if they are to avoid the financial damage typically incurred in stranded-asset write-downs of late movers.

“Electricity markets of the future will be dominated by renewable energy.”

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Utilities must embrace energy transition to survive: IEEFA

The bleak future facing utilities that do not commit wholeheartedly to the energy transition has been laid bare in a new report by US energy policy think-tank the Institute for Energy Economics and Financial Analysis (IEEFA).

“Electricity utilities that perform best going forward will likely be those that transition to renewable energy-based models in a way that avoids the financial damage typically incurred by late movers,” the organisation says in its Global Electricity Utilities in Transition report. “Those that avoid or work against the roll-out of renewables will be met by a future that does not include them.”

It adds that wherever utilities compete to sell electricity on an open market, “those at the forefront of renewables will see significant upside while the owners of fossil-fuel and nuclear-powered fleets will suffer”.

“Crucially, renewables need only capture a relatively small market share for disruption to occur, and to continue.”

The report points out that renewables generation, which has no fuel costs, is pushing down wholesale electricity prices around the world and consistently outbidding fossil-fuel generation.

“The rapid uptake of renewable energy, especially of solar and wind, has steadily undermined utilities’ traditional business models, particularly in countries where electricity demand is flat or in decline,” it says. “In such cases, zero-margin-cost renewables eat away at the utilisation rates of coal-fired power stations, often rendering them loss-making operations.”

In Europe, wholesale prices have fallen from around €80 ($94) per MWh in 2008 to €30 today, a fact that led Germany’s E.ON and RWE to separate their renewables and fossil-fuel operations.

Companies that are belatedly committing to transition, “have destroyed significant shareholder value in the meantime”, the report says, pointing to the International Energy Agency’s assertion that about $150bn of asset impairments were incurred by European utilities between 2010 and 2016.

'All industries evolve all the time – utilities are no exception'

The study cites Italy’s Enel and Florida-based NextEra as the forward-thinking global renewable-energy leaders that have gained the upper hand on their rivals.

Among those with the worst business plans are the US’s NRG, which has seen “the destruction of shareholder wealth”, and Japan’s Tepco, which has struggled in the aftermath of the Fukushima nuclear disaster.

But it is South Africa’s coal-focused Eskom that comes in for the greatest criticism.

“Eskom provides an example of a utility that not only fails to respond to the energy revolution, but fails its owners and its customers as well,” the report says.

The state-owned company is investing about $34bn in two massive, delayed coal-fired power plants totalling 8GW — despite already having about 5GW of overcapacity — while refusing to sign offtake agreements with renewable-energy providers that have won government contracts. It has debts of $26.8bn, which are due to almost double by 2021, but annual net profits of only $68.3m. It seems likely to slip into default in the next five years, placing a massive financial burden on the government, which has guaranteed much of this debt.

Unknowns linger as South Africa hopes for renewables restart

“Eskom’s campaign against renewables [which are about 40% cheaper than new coal-fired power in South Africa] and its insistence on building out coal-fired capacity in a market with declining demand will see Eskom’s borrowing and interest costs balloon, eliminating profits and crippling the utility’s ability to generate cash,” the report says.

“Efforts by Eskom to rectify management missteps through large tariff increases will mean yet more financial pain for the South African public, for whom electricity prices have quadrupled since 2007.”

The report concludes: “Electricity utilities still considering how and when to embrace the global shift toward renewables would do well to accelerate their transition if they are to avoid the financial damage typically incurred in stranded-asset write-downs of late movers.

“Electricity markets of the future will be dominated by renewable energy.”